What is a Wells Notice, Explained

A Wells notice is not a final determination of guilt or wrongdoing, which means the recipient has an opportunity to respond and make their case before administrative action is taken . Wells' notification procedure, however, is a clue that the SEC is considering taking action, and how it could materially impact the recipient and any related investors.

Take the case where the SEC is investigating possible insider trading violations in a publicly traded company. The SEC suspects that one of the company's officials may have engaged in prohibited stock trading before a major announcement was made based on nonpublic information.

The SEC would issue a Wells Notice to the suspected employee in this situation, alerting the person to the investigation of the trade violations and giving the individual a chance to refute the charges before deciding whether or not to take action of execution. So what happens after a Wells review is posted? Normally, the Wells notice lists the specific charges against the person and provides a time frame for responding to the SEC, as outlined in the steps below.

This is how the Wells notification process generally works:

Investigation

To verify whether there is sufficient justification to take enforcement action, the SEC reviews potential violations of securities laws.

Notification

The SEC will send a Wells Notice to the person or company in question if it decides there is sufficient evidence of potential misconduct. The Wells Notice will normally list the particular charges and give the recipient a chance to respond, known as the "Wells Response".

For example, Coinbase received a Wells Notice in March 2023 from the SEC, which identified potential violations of securities law in relation to some of its listed digital assets, the Coinbase Earn staking service, Coinbase Prime, and Coinbase Wallet. The SEC released the Wells Notice after conducting a preliminary investigation.

Answer

The recipient of the Wells notice can respond in writing or request an in-person meeting with the SEC to discuss the charges and provide a defense. This response may contain arguments or supporting data to support the defense, as well as any relevant mitigating circumstances.

Decision

The SEC will decide whether to pursue further enforcement action based on the response and any other data collected. The SEC can file a lawsuit in federal court seeking fines or other remedies if it decides to sue or be charged with securities fraud.